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Winds of change: Is Kaufland a cause for concern?

Just as Airbnb disrupted the hotel and resort sector and Uber transformed the taxi industry, retailers are facing their own challenges. The growth of online shopping, an increasingly price-conscious consumer, greater domestic competition and the entry of international players like Kaufland are all having an impact.

While it is reasonable to expect that during these times of change incumbent retailers feel anxious about the future, it is futile to “protest” against change itself or perceptions of “fairness”.

In a free market economy retail businesses will open, expand, contract, close, relocate and enter new markets, seeking new opportunities. Change is enviable, exciting and at times daunting. However, as the late, great Henry Ford once said, “stopping your watch in an attempt to save time will only waste time”. In other words, rather than doing something proactive, those experiencing change often stop moving forward. Signs are hung in protest, blockades and strikes are arranged, and press releases are published, but the change still occurs. Incumbent retail businesses either adapt or fail.

How the market is changing

The food and grocery market will continue to fragment. Just like in the US, the UK and the rest of Europe, the Australian grocery market is beginning to split, with discounters at one end and mainstream supermarkets at the other. While discount grocers continue to outperform supermarkets and convenience stores globally, the “top end” of the market appears ripe for exploitation. Globalisation, innovation, multiculturalism, media, travel and the internet have shifted power from the retailer to the consumer.

Speed is becoming a point of difference between retailers. Research has found 25 per cent of shoppers are willing to pay a bit extra to have their online purchases delivered that afternoon. The advantage physical stores have always had over online was immediacy. Walk in, grab it and go. While online retail had an endless range of choice and often lower prices, shoppers had to wait. But “same day” delivery undermines that, combining the convenience of online shopping with the immediacy of bricks and mortar. New retailers and logistics companies are selling us time and convenience just as much as they are selling products or services.

Supermarkets are shrinking and this will put pressure on incumbent convenience retailers like IGA and Foodworks. Last year, Coles announced the rollout of up to 120 smaller-sized “Coles Local” supermarkets. This follows the lead taken by other large retailers such as Woolworths (Metro), Walmart (Neighbourhood), Sainsbury’s (Local) and Tesco (Express). Australia’s growing population may mean more customers, but it is also putting pressure on retailers in terms of available real estate and rents. As population density increases, mostly in urbanised areas, many retailers are shrinking to grow. Retailers have responded to increased costs and competition in two ways: either by “rightsizing” – closing underperforming and unprofitable stores – or by “downsizing” – shrinking their store footprints. Smaller store formats allow retailers to maintain a bricks-and-mortar presence at a more affordable cost.

The growth of the German discounter

Aldi has now captured about 12 per cent of the goods and grocery market, growing from strength to strength since its entry into the market in 2001. The next German discounter to hit our shores is Kaufland and potentially Lidl. The Schwarz Group, owners of Kaufland and Lidl, are the fourth largest retailer in the world, operating across more than 26 counties and generating more than US$100 billion in sales every year – substantially more than Australia’s Coles and Woolworths combined. With more than 60 per cent of revenue coming from their international operations, Kaufland and Lidl have both scale and know-how on their side.

Kaufland, best described as a “hypermarket”, is similar in many ways to US Costco – a combination of discount department store with a substantial food and grocery offer. Lidl predominantly carries private label products but also offers a fixed ranged of appliances, general merchandise, apparel and brand name products. All at very low prices. Across Europe, the UK and North America, discounters like Aldi and Lidl have carved out a strong market position and attained shopper loyalty and trust. We should expect to see the same market shift here in Australia.

“Save our Shops” parallels with Uber

When Uber quietly entered the market in 2012, the taxi industry was not too perplexed, hanging on to the fact it was an illegal service. However, as the ride sharing app continued to grow in popularity they became worried. Protests were held, airports were blockaded and submissions to state governments and the ACCC were delivered. The end result: consumers won out. Consumers demanded more competition in the market, more choice, lower prices and better service. Soon, the service became legal and other players like Ola, GoCatch and Lyft entered the market. The market changed and only then did the taxi industry adapt, developing apps of their own and tracking software.

The market is constantly changing. Consumers will have higher expectations, demand lower prices, better service, more choice and faster delivery. If you don’t adapt, they will vote with their feet and go elsewhere.Resistance is futile, protests are counter-productive. It is better to invest energy in your business than against your competitor.

Differentiate, don’t demonstrate

In recent months, an industry group made up of FoodWorks, IGA, Friendly Grocer and smaller independent retailers launched a “Save our Shops” campaign in protest at the arrival of Kaufland. Jos de Bruin, Master Grocers Association CEO, who is involved with the Save Our Shops campaign said that the German retailer poses a “major risk to any family enterprise and private business”.

Yet these smaller independent businesses may have little to worry about. Firstly, the business models are very different, attracting a different consumer, seeking a different value proposition – convenience store versus hypermarket. Few will drive to these outer lying suburbs, park and enter these massive stores to pick up a few items. Secondly, “a rising tide lifts all boats”. These large destination hypermarkets will draw in consumers from other areas, meaning other local retailers win out from extra foot traffic.

So, rather than demonstrating against the entry of this new retail powerhouse, maybe it would be better, more productive, to focus on points of difference. Faster, friendlier service, expert advice and product knowledge, local produce or exclusive ranges could help smaller players stand out from the competition.

Gary Mortimer is an associate professor in marketing and international business at Queensland University of Technology. This article originally appeared in the January 2019 issue of Inside FMCG magazine, and on sister-site Inside FMCG.

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